Author Question: In the Interest Parity Condition, Rt - R t = ( - Et)/Et + xt, where Rt - R t is the interest rate ... (Read 72 times)

TVarnum · **on:** Jun 30, 2018

In the Interest Parity Condition, Rt - R t = ( - Et)/Et + xt, where Rt - R t is the interest rate differential and ( - Et)/Et is the expected change in the exchange rate, what does xt stand for if it potentially is a market efficient difference

between the two? A) market inefficiency
B) risk premium
C) forecast error
D) tracking error
E) excessive volatility

Question 2

Trade liberalization should precede capital account liberalization. Discuss.

What will be an ideal response?

tsternbergh47 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

B

Answer to Question 2

The answer is probably true. The issue is related to the theory of second best and the proper sequence of reform measures. Of course, students may argue against such step-by-step measures.